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April 5, 2010 - This Week’s Topics:
- New Mortgage Aid Plan Announced
- Mortgage Relief Band Aid
- Cash is Once Again King
- Spring Outlook Bleak for Home Sales
- Foreclosing on God
- “Pig in the Python” Primary Reason for Foreclosure
- Knocking On That Front Door
New Mortgage Aid Plan Announced
On Friday, President Obama announced a major reworking of the troubled $75 billion plan to prevent foreclosures. The revamped plan is designed to help unemployed homeowners and those who owe more on their mortgage than their home is worth. Three to four million homeowners are targeted with the plan. Borrowers will be able to get help in one of three ways: 1) unemployed homeowners can get a three-six month break on their mortgage payments, 2) banks will get financial incentives to reduce mortgage balances for underwater homeowners, or 3) lenders can offer refinanced loans backed by the FHA for those borrowers. Help should be available in the coming months. The piece for unemployed homeowners is designed to give them time to find a job. During that three-six month period, their mortgage payments will be no more than 31% of their monthly income. If a job is found during that time, the homeowner will be reevaluated for a loan modification. If a job is not found, they will be encouraged to enter into a short sale. The success of the program depends on the mortgage companies’ willingness to participate. To qualify, homeowners must have a mortgage of less than $729,750 and prove financial hardship. At least 31% of pre-tax income must be being spent on the mortgage.
Mortgage Relief Band Aid
The government is searching for the best relief to the housing crisis, but if it were that easy, someone would have come up with the ideal solution by now. Many agree that loan modifications provide the best option, but targeting them is more of a challenge. Trying to reach just the right population and avoid rewarding irresponsible behavior is easier said than done. That’s why it’s no surprise that the HAMP program has only helped a fraction of the projected target of those eligible. Last week’s announcement of expanded mortgage relief is really more a refinement of the current program. The major changes include more temporary loan forbearance for unemployed burrowers and incentives for creditors to offer write-downs of loan principal for underwater homeowners, instead of reductions in interest only. So the modified HAMP might help prevent a few foreclosures, but new foreclosures far outpace new loan modifications. This trend will most likely continue until the bigger economy stabilizes and the job market improves. Until then, the relief is really just a Band Aid.
Cash is Once Again King
The days of the NINJA mortgage – no income, no job, no assets, is over, and cash is once again reigning supreme in the housing market. Exotic (ok, toxic) mortgages have all but disappeared, and on old-school method of financing is taking hold. More Americans than ever are choosing to plunk down cold, hard cash for their home purchases. Of all the homes purchase in March, 27% were bought with cash, according to a survey by the National Association of Realtors (NAR). That’s an increase of 18% from a year ago. Why is this the case? Thanks to a combination of very tight credit conditions, a glut of foreclosed properties, sellers eager to get their money out without strings attached and a surge of buying by investors. This trend is especially evident in states that saw the most speculative excess in the boom years – California, Florida, Arizona and Nevada. Sellers want the expediency and certainty of cash; buyers with cash are beating out those awaiting financing. Even first-time homebuyers who are having difficulty securing loans are selling their investments or borrowing from family members to raise the needed cash.
Spring Outlook Bleak for Home Sales
Spring is synonymous with a new beginning, but for the troubled housing market, experts predict a bleak time. Falling housing prices and more distressed homes hitting the market means buyers continue to be in control, which is great news for investors. Even the government’s $14 billion program, announced last week to help troubled homeowners, won’t help much. The program is designed to curb the increasing number of foreclosures by giving lenders incentives to erase some mortgage debt and cut mortgage payments for those who are unemployed. Don’t expect to see any results from that until the fall. There’s a lot of foreclosures on the market, with more expected to come as the courts address their backlogs. This influx could further impact housing prices. We can’t forget about the looming April 30 deadline for the first-time homebuyer tax credit. Sellers continue to lower their expectations for getting top-dollar on their home sale. Home prices now are more in line with what they should be.
Foreclosing on God
It seems that nowhere is safe from the threat of foreclosure, not even churches or houses of worship. A growing number of churches across the country are defaulting on loans, facing foreclosure or declaring bankruptcy at an unprecedented pace. Why is this happening? It’s no different than with private homes. Super cheap, few-questions asked loans were a temptation that few churches could resist. But now, like millions of individual homeowners, they are paying for their mistakes. Long considered the safest of borrowers, churches gambled on real estate at a time when credit flowed and lenders were lax. Another factor? The general economic downturn has battered churches. Donations by congregants are down, investment returns are down and bank credit is hard to come by. A review of filings in the Thomson Reuters Westlaw legal database shows foreclosure proceedings against churches have nearly tripled since 2007. Court records show more than 100 churches have declared bankruptcy in the past year. Lenders are placing demands on the churches – from insisting churches hire a consultant at an extremely high daily rate ($5,000!) to monitor finances, to hiring private investigators and requiring cuts in pastoral benefits.
“Pig in the Python” Primary Reason for Foreclosure
It probably doesn’t come as a surprise to anyone to hear that the foreclosure crisis will linger for years. A primary reason for the chronic problem is a glut of delinquencies and a shortage of bank repossessions, a trend known as a “pig in a python.” New data from LPS Applied Analytics shows that the problem continues to grow. LPS slices delinquent mortgages into buckets and then measures the movement of each bucket month to month. In January, 9.34% of all loans at least 90 days late moved into foreclosure based on a six-month moving average. It was the lowest rate on record for this measure, which goes back to 1995. At the other end, loans moved into the 90-day bucket at one of the fastest clips on record, with 44.84% of all 60-day-late mortgages turning 90 days late in January. Before 2008, that number had never topped 40%.
The company points out that something has to be done to resolve the longer-run delinquencies. This is starting to be done with the encouragement of short sales. Moody’s Economy.com also predicts that short sales will increase significantly in the coming months. Some have even dubbed 2010, “the year of the short sale.”
Knocking On That Front Door
Contacting a homeowner in distress by going up and knocking on his or her front door can make anyone uncomfortable; it can be a little intimidating the first few times you do it. But with some practice, what started out as a task filled with anxiety can soon become a great way to secure some leads.
To be successful at door knocking, the buyer must understand that he or she is invading someone's safe haven. Building rapport with someone in a distressed state is difficult. Your goal should be to present yourself as non-threatening, understanding that for many people being confronted at their front door about an embarrassing issue is not pleasant. Your presence may be the first time that the reality of the homeowner's situation is being confirmed: respect their emotions.
Here are some quick tips:
- Don't look like a salesperson. Dress casually, but not too casual. Khaki's and a golf shirt will do.
- Don't speak as if you've memorized every word from a sales course. Keep your conversation natural and avoid speaking as if reading from a script.
- Speak softly, in a consistent tone, and maintain eye contact while presenting a clear, concise message.
- Don't try to impress them with your knowledge. Listen to what they have to say. Make the seller work a little to learn more about you.
- Present a clean-cut appearance. Avoid jewelry, facial hair, bright clothing -- each can cause a potential seller to make an inaccurate personal judgment. (Depends on your market!)
- Avoid using doorbells: they are loud and shocking. Knock and knock again.
- Always stand a step below the door to appear non-threatening.
Follow these steps and you'll master this no-cost deal-getting strategy in no time.
Hope your week is filled with real estate investing success.
Until next time… ~Josh
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